OSFI reviewing stress test mortgage qualification rate

Many Calgary homeowners will see their property tax bills go up this year, even as home values drop slightly.Postmedia

Word is the housing market has made a comeback.

If you’re in Calgary, you may have just checked to see if it’s April 1st.

Nope. April Fool’s Day is a couple of months away and nope, the talk about a soaring housing market isn’t about Calgary (although there have been recent signs of improvement).

The one being talked about is the Canadian housing market, which has rebounded from the dark days between 2016 and 2019, when the series of B-20 mortgage guidelines was instituted to cool sales and prices in Toronto and Vancouver.

It worked, but statistics now show the trend has turned, and you can add Victoria and Montreal to the list of cities that are heating up.

It was noticed by Stephen Poloz, governor of the Bank of Canada (BoC), speaking to the Greater Vancouver Board of Trade last month.

“Should this housing rebound continue, we will be watching for signs of extrapolative expectations returning to certain major housing markets, in other words, froth,” said Poloz. “The fact is the fundamental demand for housing appears to be outpacing our ability to build new homes, which can put renewed upward pressure on prices.

“Stronger housing activity also means more household debt, which continues to be Canada’s biggest financial system vulnerability. The good news is that with the B-20 guideline working to reduce the riskiest borrowing, we are confident that the stock of household debt is becoming less of a threat over time.”

The qualifying rate for all uninsured mortgages is the greater of the contractual mortgage rate plus two percent or the five-year benchmark rate published weekly by the BoC.

The B-20 guideline (often referred to as the stress test) falls within the purview of the Office of the Superintendent of Financial Institutions (OSFI). Since its introduction two years ago, there have been many calls from many levels to adjust the stress test, to take into account housing markets vary across Canada.

The calls for adjustment have gone unheeded by OSFI, until recently.

Ben Gully, assistant superintendent, regulation sector at OSFI, spoke to the C.D. Howe Institute on January 24, saying the use of the BoC’s benchmark rate is under review.

“For many years, our data showed the difference between the benchmark rate and the average contract rate was about two percent. This provided a healthy buffer,” said Gully. “However, the difference between the average contract rate and the benchmark has been widening more recently, suggesting that the benchmark is less responsive to market changes than when it was first proposed.”

“We are reviewing this aspect of our qualifying rate, as the posted rate is not playing the role that we intended.”

Gully wasn’t more specific about rates and adding two percent as a qualification isn’t likely to change, but applying it to the actual rate, rather than benchmark rates, would be a step in the right direction.

Gully left the door open to changes in his closing remarks.

“For OSFI, B-20 is having the desired effect of improving sound mortgage underwriting at banks,” he said. “But, when we see evidence of the need to make changes, we are open to adjustments that support our mandate.”

All Canadian home buyers would benefit from a stress test tweak, but one group that might benefit the most is millennials, says a poll commissioned by KPMG in Canada.

The KPMG Millennials and Retirement Poll surveyed 2,500 Canadians, including 1,000 millennials between the ages of 23 and 38, the largest populated generation in the country and found almost three-quarters of millennials say their goal is to own a home, but almost half say it is a pipe dream.

“The combination of rising house prices, high levels of personal debt and annual incomes that are just a fraction of the cost of buying a home compared with their parents’ generation, is pushing the dream of homeownership out of reach for many millennials,” says Martin Joyce, partner, national leader, human & social services, KPMG. “This is particularly challenging in the markets of Vancouver and Toronto.”

While millennials have higher incomes than previous cohorts, in part because of their higher educations, they are not necessarily better off, says the poll.

The debt-to-income ratio for young millennials stands at 216 percent, compared to 125 percent for Gen-Xers and 80 percent for baby boomers at the same age, primarily because of mortgage debt.

Millennials take an average of 13 years to save for a 20 percent downpayment, compared to about five years for their parents in 1976, according to a Canadian Mortgage and Housing Corporation report.

“That’s eight fewer years that millennials might have for saving more for their retirement,” says Joyce. “If they do manage to save up and buy a house now and delay retirement savings, our poll finds 65 percent of millennials fear they won’t have enough saved for retirement.”

The majority of all the generations surveyed wants Ottawa to take action such as:

• make housing more affordable;

• make it easier to use RRSPs for downpayments;

• raise TFSA limits; and,

• implement a new registered savings system, like RESPs for education savings, to make housing more affordable.

“It seems pretty clear that millennials are in a unique situation in terms of their ability to purchase a home, which has historically been a foundation for retirement stability, and most Canadians agree that the government has a role to play in making it a more achievable dream,” says Joyce.

Adjusting the stress test should be added to the list, and then, as Joyce says, “It’s time to have a national conversation.”

This Week's Flyers

Comments

We encourage all readers to share their views on our articles and blog posts. We are committed to maintaining a lively but civil forum for discussion, so we ask you to avoid personal attacks, and please keep your comments relevant and respectful. If you encounter a comment that is abusive, click the "X" in the upper right corner of the comment box to report spam or abuse. We are using Facebook commenting. Visit our FAQ page for more information.